Bank Lending Up, But Will Savers Benefit?

By Jonnelle Marte

A pickup in lending by big banks may be welcome news for borrowers, but experts say it won’t necessarily benefit savers.

As part of its first-quarter earnings announcement today, Citigroup said lending jumped 12% from a year ago. Wells Fargo and J.P. Morgan reported similar increases on Friday. Typically, such increases in lending also lead to a bump in rates for savings accounts. When lending is on the rise, banks often find themselves in need of more deposits and will sweeten their deals to bring in more money. Banks also need to have more cash on hand to fund those loans, analysts say. “The more they lend, the more liquidity they need to have,” says Dan Geller, executive vice president of Market Rates Insight.

In the current environment, however, bank experts say savers may be disappointed. After scaling back loans to all but the most creditworthy following the credit crisis of 2008, many large banks have built up more deposits than they can reasonably lend out to consumers, says Greg McBride, senior financial analysts for Bankrate.com. With even the highest quality potential borrowers still hesitant to borrow, banks have cash sitting on their books costing them interest instead of earning it, says McBride. As a result, most institutions don’t need to provide incentives or higher rates to attract more savings from their clients.

And with loan yields still low — and overall loan demand weak — banks aren’t earning much profit out of the loans they do make, “so they couldn’t afford to boost deposit rates even if they wanted to,” says Jim Sinegal, the lead banking analyst for Morningstar. On top of that, the Federal Reserve is committed to keeping rates low through at least 2014, which means banks could see their lending profits squeezed for a while, experts say.

Of course, it’s still early in the earnings season, making it unclear whether the improvements in lending are just concentrated among the bigger banks, says Sinegal. And savers in six states are seeing slightly higher rates on long-term CDs as a result of the more positive economic outlook, says Geller. Some banks, seeing a pickup in lending, may want to lock in long-term deposits at today’s lower rates, he says.

Financial advisers say most people looking for attractive saving rates will need to look beyond the traditional savings account, experts say. For example, online savings accounts offer an average yield of 0.8%, compared to 0.1% on the average savings account at a bank, says McBride. Long term savers can also find 1.15% to 1.25% on top yielding one-year CDs, says McBride. And those saving for retirement need to be willing to take on some risk in higher yielding investments like dividend paying stocks and real estate investment trusts, he says.